Where is Multi-Tenant Industrial in North County?

Little: “If you own a multi-tenant industrial project and are considering selling, you should consider selling it now while the demand is here.”

SAN DIEGO—The multi-tenant industrial market in North County has seen a drastic change over the past year from both leasing and investment standpoints, Lee & Associates ‘ Isaac Little tells GlobeSt.com. Rapidly decreasing vacancy rates for small industrial space has caused asking lease rates to soar upward across North County, and the combination of rising lease rates and low vacancy rates is the number-one factor driving investors to purchase these highly sought after multi-tenant assets. We spoke exclusively with Little about changes in this market from both a leasing and investment perspective. GlobeSt.com: What specifically has happened in the multi-tenant leasing market in North County over the past year? Little: For small tenants, it has become increasing difficult to find small industrial space to lease throughout North County. Vacancy rates for industrial space under 1,500 square feet has dropped below 2.5%, with fewer than 20 spaces available through all five cities combined. Currently, the average asking base rent for space under 1,500 square feet is approximately $1.02 per square foot, plus common operating expenses, while the five-year average asking base rent is $0.84 per square foot plus CAM, with CAMs averaging approximately $0.10 per square foot. The average time that small space under 1,500 square feet is sitting on the market has dropped to approximately two months.

Asking rent for multi-tenant industrial space between 750 square feet and 1,500 square feet has been soaring since 2012.

GlobeSt.com: What about larger multi-tenant industrial space? Little: Vacancy rates for industrial space between 1,500 square feet and 3,000 square feet have also decreased slightly below 5% across the North County markets. There are approximately twice as many options in the 1,500-square-foot-to-3,000-square-foot range when compared to space under 1,500 square feet, but it is still slim pickings in certain submarkets. Current asking rents for space in this size range average $0.95 per square foot plus CAM, while the five-year asking base rents average $0.79 per square foot plus CAM. The average time that small space in the 1,500 to 3,000 square foot range is sitting on the market is now approximately three months.

Asking rent for multi-tenant industrial space between 1,500 and 3,000 square feet has been on a similar upward trajectory to the smaller space.

GlobeSt.com: What are concessions like in this environment? Little: In addition to increased rental rates in the multi-tenant sector, rent concessions are down significantly from where they were one to two years ago. The vast majority of landlords will not entertain any lease term under two years, and many are holding firm on three-year terms. For three-year lease terms, landlords are giving up approximately one month of free rent, while on two-year deals, it is rare to see any free rent given up. With the strong tenant demand for small industrial space, I anticipate asking base rental rates to continue to increase another 8% to 10% across the board in the next six to nine months. GlobeSt.com: What’s happening with the multi-tenant industrial investment market in this region? Little: Multi-tenant industrial parks continue to be in high demand due to the points referenced above and the fact that you can purchase an existing property well below replacement costs. Any listed industrial multi-tenant investment is seeing anywhere from 10 to 20 offers from both 1031 exchange investors and local/national investment firms. Recent sale comparables reflect purchase prices ranging across the board, from $92 per square foot for a transaction in Oceanside to a recent $147 per-square-foot sale in San Marcos. Over the last year, cap rates have ranged from 5% to 6.75%. The properties trading with cap rates in the +/- 5% range are typically properties with below-market rents in place. Savvy investors are purchasing properties with much lower existing returns with the anticipation of raising existing rental rates to hit a pro-forma in the 6.5% to 7% range. I am aware of at least seven multi-tenant industrial parks that are currently in escrow and expected to close in the next 30 to 60 days, in addition to another handful which are currently in negotiations. A vast majority of these transactions are being sold off market. Over the next 12 to 18 months, investor demand for multi-tenant industrial product should continue to strengthen, provided interest rates remain low and lease rates continue to trend upwards as expected. In addition, the estimated replacements costs for this product type is approximately +- 150% of the cost to purchase an existing property. The high industrial land prices for what existing parcels remain have made it impossible to build multi-tenant and make it pencil as an investment. The combination of these trends have created a perfect storm for sellers to maximize sales prices on their multi-tenant assets. If you own a multi-tenant industrial project and are considering selling, you should consider selling it now while the demand is here. Once interest rates go up, we will see cap rates trend upwards, which will have a direct impact on what investors are willing to pay for these properties. Below is an overview of some recent sale comparables.

Recent sale comparables reflect purchase prices ranging across the board, from $92 per square foot for a transaction in Oceanside to a recent $147 per-square-foot sale in San Marcos, and over the last year, cap rates have ranged from 5% to 6.75%. ***Charts courtesy of CoStar and Lee & Associates.

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